It's for free(mium): New trend for smartphone apps

Nothing is impossible when it comes to setting prices for smartphone apps. In such a highly competitive market, freemium models are clearly on the rise in the US, UK and Germany. Staggered prices combined with cleverly communicated value are sure-fire ways to boost customer loyalty. Simon-Kucher's international App Store Study reveals further ways in which apps are successfully sold.

How much should an app cost? This is the question that's weighing heavily on the minds of app developers as they race to design apps that will turn casual users into willingly paying customers. The international App Store Study 2012 conducted by the global strategy and marketing consultancy Simon-Kucher & Partners in the US, UK and Germany analyzed the prices of 2,400 apps by price and category. Looking at the top 100 downloads and top 100 purchases in the Apple AppStore, the study shows an astonishing consensus concerning price models and ranges across the countries. Although upfront payment is the most common price model for apps (40 percent), freemium models are on the rise. In fact, almost one-third of all apps – in all three markets – use a freemium model. When looking at the four analyzed app categories, however, clear differences between games, news, productivity ("functional daily helpers") and social network apps are found.

The games category in particular is successfully utilizing the freemium model to turn customers into payers. Looking at the price levels and the differences between upfront and in-app prices, prices strongly vary: Maximum in-app prices are at times more than ten times higher than maximum upfront prices. "Nothing is impossible. Correctly communicated, there is a market for any price," states Annette Ehrhardt, Senior Director at Simon-Kucher. "It's no wonder, considering the vast variety of products you can now find as apps."

Download now, pay later: Freemium models on the rise
To attract and keep paying customers, app developers have created two different freemium price models in addition to the classical free and paid apps. On the one hand, they offer apps for an upfront payment and then offer in-app purchases ("freemium I"). On the other hand, some are offering free-to-download apps with the option of in-app purchases later on ("freemium II"). While the paid apps still dominate the market, the freemium approach is becoming an increasingly popular monetization strategy for app providers. Freemium apps in the app markets of the US, UK and Germany already account for almost one-third. "Given the newness of the model, that is almost double what we expected and definitely reflects a new trend in the industry," says Ehrhardt.

Moreover, there are almost twice as many apps without upfront payment than apps with upfront payment in the whole freemium market. This simply underlines the fact that there are other opportunities to monetize apps than the classic paywall. "'Download first, pay later' is the name of the game here. If app providers want to enter the ranks of top downloads, this is the key. Monetization would then follow," comments Ehrhardt. This is completely in line with the results of Simon-Kucher's recently published consumer App Study 2012*. The study reveals that consumer app selection is strongly influenced by top-app listings.

Looking at the diverse categories, games apps use the freemium model particularly often. This gives customers the chance to spontaneously download a game and start playing, while the game provider can make money from those who want to spend money on in-game items. In contrast, the other categories stick more to "pure" price models. In productivity and social network apps, only 20-30 percent use the freemium model; in news apps, it's a (so far) mere 15 percent. Study author Ehrhardt observes: "Although freemium models are on the rise, some apps suit them better than others. While it's perfect for game apps, it makes not much sense for an app such as flashlight. There's no added value to be gained there."

Get it for free or pay 448 dollars: Prices vary strongly
Across the countries, the majority of app prices for upfront and in-app offers range from one to five USD, GBP or EUR. Yet app prices vary strongly and providers should not focus too much on assumed price limits and very low price thresholds. Higher priced apps are also well represented in the analyzed top 100 listings; the "1-5 pricing rule" is not set in stone. "If we consider how different the value is that each and every app delivers, the vast price variation we observe is good news," adds Ehrhardt. "Uniform pricing for products of varying value is never the best approach."

The strongest price differences can be found among prices for in-app and upfront offers. No matter if in the US, UK or Germany, the cost for an in-app purchase can be up to ten times higher than for an upfront app, reaching in the freemium I model USD 108 (69.99 GBP; British game app), and in the freemium II model USD 239.99 (American social network app) or even USD 448 (EUR 359.99; German social network app). As a reason for the lower upfront prices, Ehrhardt refers to the fact that the industry consciously keeps its initial buying hurdles low. What's more, in-app offers also often include subscriptions and other products of higher value.

Interestingly, productivity apps provide the market-wide exception to the rule of low upfront prices: They use the inverse strategy of using higher average upfront prices and lower in-app prices. This might be due to the fact that they simply aren't cut out for the freemium model, as illustrated by the flashlight example, or that they don't believe in the concept.

The study is available upon request.

Annette Ehrhardt is a Senior Director and media expert with Simon-Kucher's global media and telecommunications competence center in Zurich, Switzerland.

*The recently published App Survey 2012 by Simon-Kucher analyzed the purchasing behavior and spending willingness of more than 2,300 smartphone and tablet users in the UK and Germany.

Simon-Kucher & Partners, Strategy & Marketing ConsultantsSimon-Kucher & Partners is a global consulting firm with 650 professionals in 25 offices worldwide focusing on Smart Profit GrowthSM. Founded in 1985, the company has over 25 years of experience providing strategy and marketing consulting and is regarded as the world's leading pricing advisor.

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